Last Wednesday, Governor Jerry Brown called a special session of the state Legislature to address changes to the voter enacted rainy-day fund (fund) to create a dedicated reserve that allows the state to pay down its debts and unfunded liabilities.

In 2004, voters approved the passage of Proposition 58, which directs three percent of annual revenues into the budget stabilization account (the current rainy-day fund). In 2010, the Legislature approved Assembly Constitutional Amendment  4 (Gatto), which placed a proposal to revise the fund on the November 2014 ballot for the consideration of California voters. According to the governor, the proposal contained in ACA 4 does not address the volatility of capital gains revenue, does not provide a reserve for schools to help cushion future downturns and constrains the state’s ability to pay down long-term liabilities.

Governor Brown is calling for withdrawal of the ACA 4 proposal from the 2014 ballot and proposes changes to the fund that he believes will stabilize the state’s finances during swings in capital gains revenues and provide greater protection for schools from the kind of deep reductions that were the result of the most recent recession. Specifically, the governor proposes the following changes to the fund:

• Increase deposits when the state experiences spikes in capital gains revenues
• Allow supplemental payments to accelerate the state’s payoff of its debts and liabilities
• Raise the maximum size of the rainy-day fund to ten percent of general fund revenue
• Limit withdrawals to ensure the state does not overly rely on the fund at the start of a downturn
• Create a Proposition 98 reserve to smooth school spending and avoid future cuts. This reserve for schools makes no changes to the guaranteed level of funding dedicated to schools under Proposition 98. In addition, the Proposition 98 reserve would not begin until school funding is fully restored following cuts made during the recession.

For questions regarding this issue please do not hesitate to contact CBA’s state government relations department at governmentrelations@calbankers.com.